postings by Alan White

Foreclosure Crisis Update

posted by Alan White

As the subprime foreclosure crisis grinds down slowly (there are still roughly 3 million pre-crisis subprime mortgages outstanding, many of them delinquent), and the HAMP program sunsets, the time has come to appraise the total damage done. In the ten years from 2007 through the end of 2016, about 6.7 million foreclosure sales were completed, and another 2 million or so short sales and deeds-in-lieu of foreclosure brought the total home losses to about 8.7 million, according to HOPE NOW.

Subprime mortgages accounted for 2 million of those foreclosure sales and perhaps another 500,000 of the stressed sales. The 2.5 million total home losses roughly matches predictions made at the onset of the crisis, and exceed by a considerable number the total number of subprime mortgages made to first-time home buyers from 2000 to 2007. In other words, subprime mortgages subtracted more than they added to home ownership.

The pre-crisis loans are by no means all resolved. About one million active mortgage loans were modified under the HAMP program, meaning that interest rates and payments were reduced for up to five years. Many of those mortgages will face steep rate and payment increases in the coming years, and many are also in negative equity, making sale or refinancing difficult or impossible. A total of around 8 million mortgages were modified under various programs at some point, although a significant portion of those later ended up among the 8 million home losses. The good news is that the number of homes whose mortgage exceeds the market value (underwater or negative equity) has declined from 30% of homes to fewer than 8%. The bad news is that just under 8% of homes are still underwater, a precarious situation that remains historically unprecedented.

These stats and many others can be found in an excellent new monthly housing finance data compendium from the Urban Institute.

$45 Million for Stay Violations

posted by Alan White

How much in punitive damages is enough to punish unlawful conduct and deter its repetition? $45 million was one bankruptcy court's opinion, in the case of a wrongful home foreclosure and eviction in knowing violation of the automatic stay.

The court described the plaintiff-debtors’ treatment by defendant Bank of America as Kafkaesque, and found their deeply emotional testimony (one of them attempted suicide during the ordeal) completely credible, awarding more than $1 million in actual damages for the loss of housing and emotional distress. The court also noted that Bank of America had repeatedly settled cases with federal and state regulators for hundreds of millions, and even billions, of dollars, in recognition of serious and repeated compliance failures, including some related directly to servicing home mortgages.  

The fascinating 107-page opinion grapples at length with the dilemma of awarding enough punitive damages to effectively deter the defendant while avoiding an unseemly windfall to the plaintiffs. The solution: the decision awards $40 of the $45 million punitive award to consumer advocacy organizations and the five public California law schools. Citing an Ohio case, state statutes and several law review articles, the court proposes this split award technique as an appropriate step forward in the federal common law of §362(k) punitive damages. An interesting appeal is sure to follow.

How to think about banks

posted by Alan White

Banking is not an industry; banking is not the real economy. The big banks especially are economic and political behemoths that remain unpopular and poorly understood in the popular imagination. Opinion polls show voters favor breaking them up, and some shareholders do too. While Wall Streeters may bemoan the fact that banks are no longer hot growth stocks, I suspect most voters who chose either candidate would not be saddened to see banks become public utilities. The Republican agenda to roll back Dodd-Frank, if this means unshackling the megabanks from speculating with public and taxpayer funds, will be the first betrayal by the incoming administration of its voter base.

Banks are now basically franchisees of the government's, i.e. the taxpayers', full faith and credit, as recently and eloquently explained by Professors Saule Omarova and Robert Hockett  Banks create and allocate capital because the government recognizes bank loans as money and puts taxpayers' full faith and credit behind bank IOUs. The conventional story that banks convert privately-accumulated savings into loans to borrowers is a myth. Because banks are public-private partnerships to create and allocate capital, the public can and should play a central role in insuring that the financial system serves the needs of the real economy, not just the financial economy.

So here is the first test for our new federal leaders. Are you tools of Wall Street, doing its bidding by undoing financial reform, or will you turn banks into the public utilities they ought to be?  

The Color of Credit: Cities vs. Banks

posted by Alan White

Appendix 4 Foreclosures Miami Reduced

On Election Day, the Supreme Court will hear argument in the cases of  Wells Fargo v. City of Miami and Bank of America v. City of Miami. At issue is the standing of cities to sue banks for mortgage redlining and reverse redlining.

The history of redlining is well known. Banks, in concert with the housing agencies of the New Deal, drew lines around minority neighborhoods where no home mortgage loans would be made (or backed by federal agencies). Starting in the 1990s and until the 2008 crisis, subprime mortgage lenders, some of them affiliates of major banks, targeted the same minority neighborhoods for high-cost, high-risk loans. Inevitably, the same minority neighborhoods have been devastated by the recent wave of foreclosures.

Less well known is that since 2008, the overcorrection and severe tightening of mortgage loan approvals has had a hugely disparate impact on communities of color, especially in cities. Redlining is back. 

 

Continue reading "The Color of Credit: Cities vs. Banks" »

Still Not Deleveraging American Homeowners

posted by Alan White

The Federal Housing Finance Agency has finally announced a program to reduce principal balances of distressed home mortgages held by Fannie Mae and Freddie Mac, eight years into the foreclosure crisis. Too little, too late would be an understatement to describe this initiative. According to the agency’s announcement, they expect about 33,000 homeowners to be eligible to have their mortgage debt reduced to the value of their homes. According to the Zillow negative equity report, more than 6 million homeowners have mortgage debt exceeding their home value, and almost a third of all homeowners are effectively underwater, meaning that their equity is less than 20% of the home value, making it difficult to sell or refinance.

Aggregate value of homes in the US rose from $10.9 trillion in 1998 to $28.3 trillion in 2006, then declined to $19.5 by the beginning of 2012, recovering somewhat in the past three years. This one-third decline in home values was not accompanied by a one-third decline in mortgage debt. Residential mortgage debt peaked at 10.6 trillion in 2006, and then declined to 9.5 trillion by the end of 2012, just a 10% easing. The overhang of home mortgage debt remains a huge impediment to consumer spending, wealth accumulation and the closing of the racial wealth gap in the United States. It is regrettable that the FHFA continues to take such a narrow view of its role as the regulator of our secondary mortgage market utilities and fails to pursue the social values that our taxpayer-backed housing finance system ought to advance.

Nobody Told Us

posted by Alan White

Yesterday Senator Warren rightly excoriated former Fed consumer regulator, now industry lawyer Leonard Chanin after he claimed that, prior to the 2008 crisis, the Federal ReservScreen Shot 2016-04-06 at 9.31.46 AMe Board had only anecdotal evidence that subprime mortgages were a problem. Mr. Chanin served for many years as counsel for the Fed's Consumer and Community Affairs division. In fact, three times a year, from 1996 until 2007, members of the Fed's consumer advisory council called for regulation of subprime mortgages.  The Fed held regular hearings where witnesses told Mr. Chanin and his colleagues that 1) subprime foreclosures were a serious and growing problem and 2) Congress gave the Fed legal authority to do something about it. Here are a couple of instances in which I can recall having personally warned them. 

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